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Chapter 14-1 CHAPTER CHAPTER 14 14 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING Accounting Principles, Eighth Edition Chapter 14-2 Study Study Objectives Objectives 1. Prepare the entries for cash dividends and stock dividends. 2. Identify the items reported in a retained earnings statement. 3. Prepare and analyze a comprehensive stockholders’ equity section. 4. Describe the form and content of corporation income statements. 5. Compute earnings per share. Chapter 14-3 Corporations: Corporations: Dividends, Dividends, Retained Retained Earnings, Earnings, and and Income Income Reporting Reporting Dividends Cash dividends Stock dividends Stock splits Chapter 14-4 Retained Earnings Retained earnings restrictions Prior period adjustments Retained earnings statement Statement Presentation and Analysis Stockholders’ Equity Presentation Stockholders’ Equity Analysis Income Statement Presentation Income Statement Analysis Dividends Dividends A distribution of cash or stock to stockholders on a pro rata (proportional) basis. Types of Dividends: 1. Cash dividends. 2. Property 3. Script (promissory note). dividends. 4. Stock dividends. Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share. Chapter 14-5 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Dividends require information concerning three dates: Chapter 14-6 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Cash Dividends For a corporation to pay a cash dividend, it must have: Chapter 14-7 1. Retained earnings - Payment of cash dividends from retained earnings is legal in all states. 2. Adequate cash. 3. A declaration of dividends by the Board of Directors. LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Illustration: What would be the journal entries made by a corporation that declared a $50,000 cash dividend on March 10, payable on April 6 to shareholders of record on March 25? March 10 (Declaration Date) Retained earnings Dividends payable March 25 (Date of Record) 50,000 50,000 No entry April 6 (Payment Date) Dividends payable Cash Chapter 14-8 50,000 50,000 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Allocating Cash Dividends Between Preferred and Common Stock Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends. Chapter 14-9 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Exercise Arnez Corporation was organized on January 1, 2008. During its first year, the corporation issued 2,000 shares of $50 par value preferred stock and 100,000 shares of $10 par value common stock. At December 31, the company declared the following cash dividends: 2008, $6,000, 2009, $12,000, and 2010, $28,000. Instructions: (a) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and not cumulative. Chapter 14-10 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Exercise (a) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and not cumulative. 2008 Dividends declar ed A llocation to pr ef er r ed Remainder to common $ * $ 2009 2010 6,000 $ 12,000 $ 28,000 6,000 8,000 8,000 4,000 $ 20,000 - $ * 2,000 shares x $50 par x 8% = $8,000 Chapter 14-11 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Exercise (b) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 9% and cumulative. 2008 Dividends declar ed $ 6,000 2009 2010 $ 12,000 $ 28,000 Dividends in ar r ear s A llocation to pr ef er r ed Remainder to common 3,000 * 6,000 $ - 9,000 $ - ** 9,000 $ 19,000 * 2,000 shares x $50 par x 9% = $9,000 ** 2008 Pfd. dividends $9,000 – declared $6,000 = $3,000 Chapter 14-12 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Exercise (c) Journalize the declaration of the cash dividend at December 31, 2010, under part (b). 2008 Dividends declar ed $ 6,000 2009 2010 $ 12,000 $ 28,000 Dividends in ar r ear s 3,000 A llocation to pr ef er r ed Remainder to common 6,000 $ Journal entry: Retained earnings Dividends payable Chapter 14-13 - 9,000 $ - 9,000 $ 19,000 28,000 28,000 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Stock Dividends Illustration 14-3 Pro rata distribution of the corporation’s own stock. Results in decrease in retained earnings and increase in paid-in capital. Chapter 14-14 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Stock Dividends Reasons why corporations issue stock dividends: 1. To satisfy stockholders’ dividend expectations without spending cash. 2. To increase the marketability of the corporation’s stock. 3. To emphasize that a portion of stockholders’ equity has been permanently reinvested in the business. Chapter 14-15 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Size of Stock Dividends Small stock dividend (less than 20–25% of the corporation’s issued stock, recorded at fair market value)* Large stock dividend (greater than 20–25% of issued stock, recorded at par value) * This accounting is based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares. Chapter 14-16 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Illustration: HH Inc. has 5,000 shares issued and outstanding. The per share par value is $1, book value $32 and market value is $40. 10% stock dividend is declared Retained earnings (5,000 x 10% x $40)Common stock dividends 20,00 0 distributable Additional paid-in capital Stock issued Common stock div. distributable Common stock (5,000 x 10% x $1) Chapter 14-17 500 19,50 0 500 500 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Stockholders’ Equity with Dividends Distributable H H In c. B alance S heet (partial) S to ckh o ld ers' eq u ity P aid-in capital C om m on stock, $1 par, 5,000 issued and outstanding C o m m o n sto ck d ivid en d s d istrib u tab le P aid-in capital in excess of par Retained earnings T o tal sto ckh o ld ers' eq u ity Chapter 14-18 $ 5,000 500 64,500 90,000 $ 160,000 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Effects of Stock Dividends HH Inc. Before Dividend Stockholders' equity Paid-in capital Common stock, $1 par, 5,000 issued and outstanding Paid-in capital in excess of par Retained earnings Total stockholders' equity Outstanding shares Book value per share Chapter 14-19 $ 5,000 45,000 110,000 $ 160,000 $ 5,000 32 After Dividend $ 5,500 64,500 90,000 $ 160,000 $ Net Change $ 500 19,500 (20,000) $ 0 5,500 29 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Question Which of the following statements about small stock dividends is true? Chapter 14-20 a. A debit to Retained Earnings for the par value of the shares issued should be made. b. A small stock dividend decreases total stockholders’ equity. c. Market value per share should be assigned to the dividend shares. d. A small stock dividend ordinarily will have no effect on book value per share of stock. LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Question In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n): Chapter 14-21 a. deduction from total paid-in capital and retained earnings. b. current liability. c. deduction from retained earnings. d. addition to capital stock. LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Stock Split Reduces the market value of shares. No entry recorded for a stock split. Decrease par value and increase number of shares. Chapter 14-22 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Illustration: HH Inc. has 5,000 shares issued and outstanding. The per share par value is $1, book value $32 and market value is $40. 2 for 1 Stock Split No Entry -- Disclosure that par is now $.50 and shares outstanding are 10,000. Chapter 14-23 LO 1 Prepare the entries for cash dividends and stock Dividends Dividends Effects of Stock Dividends HH Inc. Before Split Stockholders' equity Paid-in capital Common stock Paid-in capital in excess of par Retained earnings Total stockholders' equity Outstanding shares Book value per share Chapter 14-24 $ 5,000 45,000 110,000 $ 160,000 $ 5,000 32 After Split $ 5,000 45,000 110,000 $ 160,000 Net Change $ $ - 10,000 $ 16 LO 1 Prepare the entries for cash dividends and stock Retained Retained Earnings Earnings Retained earnings is net income that a company retains for use in the business. Net income increases Retained Earnings and a net loss decreases Retained Earnings. Retained earnings is part of the stockholders’ claim on the total assets of the corporation. A debit balance in Retained Earnings is identified as a deficit. Chapter 14-25 LO 2 Identify the items reported in a retained earnings Retained Retained Earnings Earnings Restrictions Restrictions Restrictions can result from: 1. Legal restrictions. 2. Contractual restrictions. 3. Voluntary restrictions. Companies generally disclose retained earnings restrictions in the notes to the financial statements. Chapter 14-26 LO 2 Identify the items reported in a retained earnings Prior Prior Period Period Adjustments Adjustments Corrections of Errors Result from: mathematical mistakes  mistakes in application of accounting principles  oversight or misuse of facts  Corrections treated as prior period adjustments Adjustment made to the beginning balance of retained earnings Chapter 14-27 LO 2 Identify the items reported in a retained earnings Prior Prior Period Period Adjustments Adjustments W ood s, In c. S tatem en t of Retain ed Earn in g s F or th e Year En d ed Decem b er 31, 2008 B alan ce, Jan u ary 1 Net in com e Divid en d s B alan ce, Decem b er 31 $ $ 1,050,000 360,000 (300,000) 1,110,000 Before issuing the report for the year ended December 31, 2008, you discover a $50,000 error (net of tax) that caused the 2007 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2007. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2008? Chapter 14-28 LO 2 Identify the items reported in a retained earnings Retained Retained Earnings Earnings Statement Statement W ood s, In c. Statem en t of Retain ed E arn in g s F or th e Year E n d ed Decem b er 31, 2008 B alan ce, Jan u ary 1, as p reviou sly rep orted P rior p eriod ad ju stm en t - error correction B alan ce, Jan u ary 1, as restated Net in com e Divid en d s B alan ce, Decem b er 31 Chapter 14-29 $ $ 1,050,000 (50,000) 1,000,000 360,000 (300,000) 1,060,000 LO 2 Identify the items reported in a retained earnings Retained Retained Earnings Earnings Statement Statement The company prepares the statement from the Retained Earnings account. Illustration 14-13 Chapter 14-30 LO 2 Identify the items reported in a retained earnings Retained Retained Earnings Earnings Statement Statement Question All but one of the following is reported in a retained earnings statement. The exception is: Chapter 14-31 a. cash and stock dividends. b. net income and net loss. c. some disposals of treasury stock below cost. d. sales of treasury stock above cost. LO 2 Identify the items reported in a retained earnings Statement Statement Analysis Analysis and and Presentation Presentation Chapter 14-32 Illustration 14-15 LO 3 Prepare and analyze a comprehensive stockholders’ equity Statement Statement Analysis Analysis and and Presentation Presentation Stockholders’ Equity Analysis Return on Common Stockholder s’ Equity Net Income Available to Common Stockholders = Average Common Stockholders’ Equity This ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders. Chapter 14-33 LO 3 Prepare and analyze a comprehensive stockholders’ equity Statement Statement Analysis Analysis and and Presentation Presentation Income Statement Presentatio n Chapter 14-34 Illustration 14-17 LO 4 Describe the form and content of corporation income Statement Statement Analysis Analysis and and Presentation Presentation Income Statement Analysis Earnings Per Share Net Income minus Preferred Dividends = Weighted-Average Common Shares Outstanding This ratio indicates the net income earned by each share of outstanding common stock. Chapter 14-35 LO 5 Compute Earnings Per Share. Statement Statement Analysis Analysis and and Presentation Presentation Question The income statement for Nadeen, Inc. shows income before income taxes $700,000, income tax expense $210,000, and net income $490,000. If Nadeen has 100,000 shares of common stock outstanding throughout the year, earnings per share is: Chapter 14-36 a. $7.00. b. $4.90. c. $2.10. d. No correct answer is given. ($490,000 / 100,000 = $4.90) LO 5 Compute Earnings Per Share. Copyright Copyright “Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Chapter 14-37